05/12  closing prices/ revised 05/16/2022 11:38 GMT  | 05/12   OPEC Basket $112.37  +3.34| 05/13    Mexico Basket (MME)  $106.36  +4.22| 03/31 ▲  Venezuela Basket $88.12  (Estimated OPEC) | 05/13   Brent July BRN00 $111.55  +4.10| 05/13 WTI  Texas Intermediate Jun CL00  $110.49  +4.36 | 05/13   Natural Gas May NGM22  $7.663  -0.076| 05/13 Gasoline Jun RBM22    $3.9578  +0.1661 |  05/13 Heating Oil  Jun  HOK22   $ 3.9212  -0.0051 |  06/13  Active U.S. Rig Count (Oil & Gas)  714  +9 | 05/16   USD/MXN Mexican Peso  $20.1013  Live data | 05/16  EUR/USD $1.0430  Live data | 05/16  USD/Bs. (Bolivar)  $4.77050000  |  –        05/12  closing prices/ revised 05/16/2022 11:38 GMT  | 05/12   OPEC Basket $112.37  +3.34| 05/13    Mexico Basket (MME)  $106.36  +4.22| 03/31 ▲  Venezuela Basket $88.12  (Estimated OPEC) | 05/13   Brent July BRN00 $111.55  +4.10| 05/13 WTI  Texas Intermediate Jun CL00  $110.49  +4.36 | 05/13   Natural Gas May NGM22  $7.663  -0.076| 05/13 Gasoline Jun RBM22    $3.9578  +0.1661 |  05/13 Heating Oil  Jun  HOK22   $ 3.9212  -0.0051 |  06/13  Active U.S. Rig Count (Oil & Gas)  714  +9 | 05/16   USD/MXN Mexican Peso  $20.1013  Live data | 05/16  EUR/USD $1.0430  Live data | 05/16  USD/Bs. (Bolivar)  $4.77050000  |  –        05/12  closing prices/ revised 05/16/2022 11:38 GMT  | 05/12   OPEC Basket $112.37  +3.34| 05/13    Mexico Basket (MME)  $106.36  +4.22| 03/31 ▲  Venezuela Basket $88.12  (Estimated OPEC) | 05/13   Brent July BRN00 $111.55  +4.10| 05/13 WTI  Texas Intermediate Jun CL00  $110.49  +4.36 | 05/13   Natural Gas May NGM22  $7.663  -0.076| 05/13 Gasoline Jun RBM22    $3.9578  +0.1661 |  05/13 Heating Oil  Jun  HOK22   $ 3.9212  -0.0051 |  06/13  Active U.S. Rig Count (Oil & Gas)  714  +9 | 05/16   USD/MXN Mexican Peso  $20.1013  Live data | 05/16  EUR/USD $1.0430  Live data | 05/16  USD/Bs. (Bolivar)  $4.77050000  |  –       

China Could Be A Lifeline for Russian Energy

The liquefied natural gas terminal at the Yangshan Deepwater Port in Shanghai, China, on Saturday, Oct. 9, 2021.
(Qilai Shen/Bloomberg)

By Erica Downs

Ever since the U.S. the European Union, and other nations imposed sanctions on Russia for its invasion of Ukraine, outside observers have wondered whether—and to what extent—China will help Russia weather the blows to its economy. Energy features prominently in such discussions for several reasons. 

First, Russia is the world’s third-largest oil producer and its second-largest producer of natural gas. Western sanctions have stopped the flow of technology and capital to Russia’s oil and natural gas industry, and traders are currently shunning barrels of Russian oil.

Second, China is the world’s largest importer of crude oil and natural gas, and Russia was its second-largest oil supplier and its third-largest natural gas supplier in 2021. Moreover, less than three weeks before Russian troops marched into Ukraine, China’s leader, Xi Jinping, and Russia’s president, Vladimir Putin, declared that their countries’ friendship had “no limits.” In addition, Chinese officials have stated that China will not participate in Western sanctions and that normal trade and economic cooperation with Russia will continue.

Will China, perhaps motivated by energy security concerns or the opportunity to secure supplies at attractive prices, purchase more Russian oil and natural gas and, in the process, throw Russia an economic lifeline?

There is precedent. In May 2014, in the wake of the imposition of Western sanctions on Russia for the annexation of Crimea, Putin traveled to China to attend a meeting of the Shanghai Cooperation Organization. During his visit, Russia’s state pipeline monopoly, Gazprom, and China National Petroleum Corporation signed an agreement for the delivery of 38 billion cubic meters of natural gas over 30 years through the Power of Siberia Pipeline. Two Chinese banks also agreed to provide Russia’s largest independent natural gas producer, Novatek , with $12.5 billion in euros and renminbi to develop the first liquified natural gas project in Russia’s Far North.

Fast forward to March 2022.

In the short term, there are limits to the amount of additional oil and especially natural gas that likely will flow from Russia to China.

First, the number of extra barrels of Russian oil that is absorbed by China is likely to be shaped by a variety of factors. These include how many barrels can be displaced from other suppliers, the availability of refining and storage capacity, prices and the impact of China’s Covid lockdowns on its oil demand.

Second, Western sanctions appear to be limiting Chinese purchases of Russian oil. For example, China’s independent refiners, which are concentrated in northeast China and favor Russia’s ESPO crude, and the Chinese banks that provide them with letters of credit, have been acting with caution due to concerns about running afoul of future U.S. sanctions. There have been reports of some independent refiners putting ESPO crude purchases on pause due to uncertainty over sanctions and others being forced to find alternative payment methods for Russian oil after banks refused to provide letters of credit. Similarly, state-owned refiners seeking to purchase Russia’s Urals crude, which is trading at a record discount to Brent crude, are reportedly having trouble finding shipping companies willing to transport Russian barrels.

Third, Russia’s natural gas export pipelines are in the wrong place for it to divert supplies bound for Europe to China. The capacity of Russia’s eight major pipelines currently delivering natural gas to Europe is 220 bcm, nearly six times that of the one pipeline delivering natural gas to China, the Power of Siberia (38 bcm), which is not yet operating at full capacity. Moreover, the natural gas that Russia delivers to Europe and China by pipeline is supplied by different fields that are not connected.

Russia may have more success in diverting some LNG exports to China. LNG is transported from Russia to China by ship instead of a cross-border pipeline. But the volumes available for diversion are small. In 2020, Russia exported 17.2 bcm of LNG to Europe, and China imported 94 bcm (including 6.9 bcm from Russia), of which almost 40 bcm were spot purchases (as opposed to sales under term contracts). These numbers suggest China has the capacity to absorb more Russian LNG.

In the long term, Russia’s invasion of Ukraine will very likely result in an even more robust China-Russia energy relationship.

The European Union’s plan to phase out Russian oil, natural gas, and coal is likely to galvanize Putin to accelerate the development of infrastructure to expand natural gas exports to China. The two countries took another step in this direction during Putin’s visit to Beijing in February, when Gazprom and China National Petroleum Corporation agreed to build a new 10 bcm pipeline to deliver natural gas from the Russian Far East to China. When complete, this project will expand Russia’s export pipeline capacity to China by almost 25% to 48 bcm.

Putin, however, is likely to want Beijing to agree to an even bigger pipeline, the Power of Siberia II. This long-discussed project would have the capacity to deliver 50 bcm of natural gas from West Siberia (some of which is currently exported to Europe) to China via Mongolia. If Russia were to sign a supply contract with China for natural gas to be delivered through the Power of Siberia II, then Gazprom would build an interconnector between its pipelines that flow to the west and the east, which would allow the company to send to China natural gas from fields that currently only supply Europe.

The Power of Siberia II is probably attractive to China because it can deliver a large volume of natural gas—more than one-third of China’s imports in 2020—overland. Not only would gas shipped via the Power of Siberia II avoid the risks associated with traveling long distances through the sea lines of communication. It would also be dispatched from a country whose capital is highly unlikely to succumb to pressure from Washington to turn off the taps.

That said, one of the hallmarks of China’s approach to energy security has been the diversification of energy suppliers and import routes to avoid becoming excessing dependent on any single supplier or import routes. Would importing 98 bcm of pipeline gas plus LNG from Russia would make China excessively reliant on its northern neighbor? Beijing now has a decision to make. 

______________________________________

Erica Downs is a senior research scholar at the Center on Global Energy Policy at Columbia University’s School of International and Public Affairs. Energiesnet.com does not necessarily share these views.

Editor’s Note: This article was originally published by Barrons on March 25, 2022. EnergiesNet.com reproduces this article in the interest of our readers. All comments posted and published on EnergiesNet.com, do not reflect either for or against the opinion expressed in the comment as an endorsement of EnergiesNet.com or Petroleumworld.

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EnergiesNet.com 04 07 2022

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